Ground Rules

FTSE Global Bonds Index Series v1.9

ftserussell.com September 2017

Contents

1.0 Introduction ...... 3

2.0 Management Responsibilities ...... 7

3.0 FTSE Russell Index Policies ...... 8

4.0 Eligible of Securities ...... 9

5.0 Price Sources ...... 11

6.0 Periodic Change to the Portfolios ...... 12

Appendix A: FTSE Global Index Series Family ...... 14

Appendix B: FTSE Index Series Calculation Formulae ...... 15

Appendix C: Further Information ...... 18

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Section 1 Introduction

1.0 Introduction

1.1 The FTSE Global Bond Index Series

1.1.1 The FTSE Global Bond Index Series was launched in 2002, and is owned by FTSE International Limited. It is a series of indexes covering the principal markets and selected corporate markets.

1.1.2 The series currently consists of four homogenously constructed bond families:

 FTSE Global Government Bond Indexes  FTSE Global Pfandbrief Indexes  FTSE Indexes  FTSE Euro Emerging Markets Bond Indexes A full list of the indexes and sub indexes is available in Appendix A. 1.2 These Ground Rules

1.2.1 This document sets out the Ground Rules for the construction and management of the FTSE Global Bond Index Series.

1.2.2 There is a separate set of Ground Rules available for FTSE UK Gilts. These can be accessed from www.ftserussell.com.

1.2.3 FTSE hereby notifies users of the Index that it is possible that circumstances, including external events beyond the control of FTSE TMX, may necessitate changes to, or the cessation of, the Index and therefore, any financial contracts or other financial instruments that reference the Index or investment funds which use the index to measure their performance should be able to withstand, or otherwise address the possibility of changes to, or cessation of, the Index. 1.2.4 Index users who choose to follow this Index or to buy products that claim to follow this Index should assess the merits of the Index’s rules-based methodology and take independent investment advice before investing their own or client funds. No liability whether as a result of negligence or otherwise is accepted by FTSE International Limited (FTSE) nor its subsidiary undertakings (or any person concerned with the preparation or publication of these Ground Rules) for any losses, damages, claims and expenses suffered by any person as a result of:

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 any reliance on these Ground Rules, and/or  any errors or inaccuracies in these Ground Rules, and/or  any non-application or misapplication of the policies or procedures described in these Ground Rules, and/or  any errors or inaccuracies in the compilation of the Index or any constituent data in the FTSE TMX Canada Index Family 1.3 Index series objectives

1.3.1 The objective is to create and maintain a series of indexes for the international bond markets for use as a benchmark by the global investment community. To achieve this, we have sought to establish the Index Series as being:

 Comprehensive  Consistent  Flexible  Accurate  Investable  Transparent  Predictable  Representative  User-driven 1.4 Indexes

1.4.1 All FTSE Global Bond indexes except the FTSE Euro Emerging Markets Bond Indexes are calculated as real-time indexes and fixed at the end of each individual country’s business day. For the Eurozone, a business day is, by definition of the , when the TARGET system is open for business – ‘a TARGET business day’. The FTSE Euro Emerging Markets Bond Index is calculated once a day only.

1.4.2 All indexes have the following five sub indexes:

 3 years  5 years  5–7 years  7–10 years  over 10 years The sub indexes in which each bond is assigned depends on the maturity term from the appropriate day (T+3) for trades performed on the first business day of the month. This excludes China where the appropriate settlement day is T+2 and Turkey where settlement is T+0 during morning trading and T+1 in the afternoon.

1.4.3 FTSE Sterling Corporate and Euro Corporate Bond Indexes have the following additional sub- indexes: Maturity ICB Industry Group 1–5 years Oil & Gas Basic Materials 5–10 years Industrials Consumer Goods 5–15 years Health Care Consumer Services 10–15 years Telecommunications Services Utilities over 15 years Financials Technology

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1.4.4 Besides the maturity bands sub indexes, the FTSE Corporate Bond Indexes (Euro and Sterling) also cover the following rating indexes: Sub Indexes Rating Agency Equivalent Ratings Definition Fitch S&P Moodys AAA AAA AAA Aaa AA AA- to AA+ AA- to AA+ Aa3 to Aa1 A A- to A+ A- to A+ A3 to A1 BBB BBB- to BBB+ BBB- to BBB+ Baa3 to Baa1

For Corporate Bond Indexes, where Fitch, S&P and Moodys have applied different ratings, the lowest credit rating from the rating agencies is used, taken at the time of the monthly portfolio- rearrangement. For new issues, the credit rating assigned on issue is used. If this is not available, the long-term credit rating of the issuer will be used in its place.

To be eligible for Emerging Market Bond Indexes, issues will need to have credit rating of BBB or higher. Moreover, where Fitch, S&P and Moodys have applied different ratings, the highest credit rating from the rating agencies is used, taken at the time of the monthly portfolio-rearrangement. For new issues, the credit rating assigned on issue is used. If this is not available, the long-term credit rating of the issuer will be used in its place. 1.4.5 A sub index, which begins at a later time, starts with index values of a suitable parent index as of the sub index start date. 1.5 Characteristics of the Index Series

1.5.1 FTSE Global Government Bond Indexes consist only of issues by central governments in their home currencies or, for EMU countries, in Euro.

1.5.2 FTSE Pfandbrief Indexes

Only Jumbo Pfandbrief bonds from German Issuers or issues that are comparable in structure and quality to the German Jumbo Pfandbrief market, from other EU countries in Euro currency, are included: Germany Pfandbrief (Jumbo Pfandbrief) Pfandbrief () Pfandbrief (Cedulas Hipotecarias) Finland Pfandbrief (Covered Bond) Pfandbrief (Obligations Foncières) Pfandbrief (Lettres de gage) Pfandbrief (Asset Backed Pfandbrief (Pfandbrief) Securities) UK Pfandbrief (Asset Backed Securities)

1.5.3 FTSE Euro Emerging Market Bond Index Series

The eligible bonds are government securities from central states and authorities, central banks, regions, and cities from countries, which belong to the Emerging markets, as defined by FTSE country classification (available from www.ftse.com).

1.5.4 FTSE Corporate Bond Indexes

FTSE Euro and Sterling Corporate Bond Euro and Sterling issues from corporate entities are included. This excludes Government authorities or other public issuers. The index also includes issues of corporate entities, with a mi. Each bond is

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classified under the FTSE Industry Classification Benchmark system. Non-Financials (headline index less Banks) is calculated as an additional separate index.

1.6 Index Methodology

1.6.1 The purpose of the family of FTSE Global Bond Indexes is to measure the average performance that holders of the relevant types of bonds experience over time. This is achieved by creating for each index a representative portfolio of bonds, and measuring their performance. At the end of each month the constituents of the portfolio are reviewed. At this review bonds may be removed or added to the index portfolio. It is assumed that any rebalancing does not have a cost. The contents of a portfolio do not change during any month, except in exceptional circumstances.

The rules used in their construction broadly follow the EFFAS standardized ones for bond indexes. The formulae used are described in Appendix B. 1.7 Capital Index (also known as the Price Index or the Clean Price Index)

1.7.1 The capital index of all the listed indexes in Appendix A are calculated every business day. Each capital index is an arithmetically weighted index based on the clean price, and weighted by the nominal amount outstanding. 1.8 Total Return Index (also known as the Performance Index)

1.8.1 A total return index is calculated for all the indexes. A total return index takes into account the price changes and accrual and payments of each bond.

1.8.2 In addition to the Capital Index and Total Return Index, the following fundamentals of bond indexes are also calculated:

 Average

 Average Gross Redemption Yield  Average Time to Maturity

 Average (Macaulay) Duration

 Average Modified Duration  Average Convexity

 The sum of the nominal value of all bonds in each index

 The number of bonds in each Index, and  The weight of the index in relation to its relevant aggregated index (when applicable)

1.8.3 In the case of FTSE Sterling Corporate Bond Indexes, semi-annual yields are calculated where appropriate.

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Section 2 Management Responsibilities

2.0 Management Responsibilities

2.1 FTSE International Limited (FTSE)

2.2 FTSE TMX Global Debt Capital Markets Limited (FTSE TMX Ltd)

2.2.1 FTSE TMX Ltd is the benchmark administrator of the index series.

2.2.2 FTSE TMX is responsible for the daily calculation, production and operation of the FTSE Global Bond Index Series and will:

 maintain records of all the constituents;

 be responsible for the addition and deletion of bonds and changes of nominal amounts, in accordance with the Ground Rules. 2.3 Amendments to these Ground Rules

2.3.1 These Ground Rules shall be subject to regular review by FTSE Russell to ensure that they continue to meet the current and future requirements of investors and other index users. Any proposals for significant amendments to these Ground Rules will be subject to consultation with FTSE Russell advisory committees and other stakeholders if appropriate. The feedback from these consultations will be considered by the FTSE Russell Governance Board before approval is granted. 2.3.2 As provided for in the Statement of Principles for FTSE Russell Fixed Income Indexes, where FTSE Russell determines that the Ground Rules are silent or do not specifically and unambiguously apply to the subject matter of any decision, any decision shall be based as far as practical on the Statement of Principles. After making any such determination, FTSE Russell shall advise the market of its decision at the earliest opportunity. Any such treatment will not be considered as an exception or change to the Ground Rules, or to set a precedent for future action, but FTSE Russell will consider whether the Rules should subsequently be updated to provide greater clarity.

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Section 3 FTSE Russell Index Policies

3.0 FTSE Russell Index Policies

These Ground Rules should be read in conjunction with the following policy documents which can be accessed using the links below: 3.1 Statement of Principles for FTSE Fixed Income Indexes (the Statement of Principles)

Indexes need to keep abreast of changing markets and the Ground Rules cannot anticipate every eventuality. Where the Ground Rules do not fully cover a specific event or development, FTSE Russell will determine the appropriate treatment by reference to the Statement of Principles for FTSE Fixed Income Indexes which summarises the ethos underlying FTSE Russell’s approach to index construction. The Statement of Principles is reviewed annually and any changes proposed by FTSE Russell are presented to the FTSE Russell Policy Advisory Board for discussion before approval by FTSE Russell’s Governance Board.

The Statement of Principles for Bond Indexes can be accessed using the following link: Statement_of_Principles_Fixed_Income_Indexes.pdf 3.2 Policy for Benchmark Methodology Changes

3.2.1 Details of FTSE Russell’s policy for making benchmark methodology changes can be accessed using the following link:

Policy_for_Benchmark_Methodology_Changes.pdf

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Section 4 Eligible of Securities

4.0 Eligible of Securities

4.1 Eligibility of Bonds

4.1.1 All straight bullet bonds denominated in the appropriate currency and issued by qualifying issuers, maturing in one year or more are considered for inclusion in the FTSE Global Bond Index Series. For the Turkish Lira Government Bond Index both bullet and zero coupon bonds are included with minimum maturity eligibility being 6months or more. 4.1.2 Zero coupon bonds may be included.

Strippable bonds are included in the indexes with weights which assume that they have not been stripped.

Excluded from the indexes are:

 Coupon strips and maturity strips (separated interest and capital repayment securities)  Partly-paid bonds  Variable interest bonds (including floating rate bonds)  Index linked bonds  Callable, puttable and extendible bonds  Convertible bonds  Bonds with no final redemption date  Subordinated or junior issues 4.1.3 The bonds must have a current market quotation to be included. Government bonds traditionally have far more price quotes than corporate bonds. An issue is generally not included if there are prices available from only one market maker.

4.1.4 For Jumbo Pfandbrief the German Association of Mortgage banks ‘VDH’ rules that a minimum of three market maker quotes must be available at the time of issue launch. If the number of price contributors falls below three after some time, this does not automatically lead to the exclusion of the referring bond from the Index portfolio.

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4.2 Minimum Nominal Issuance of a Bond

4.2.1 The minimum nominal issuance of a bond for FTSE Global Government Bonds Index Series is shown in the table: Country/Region Minimum Issuance Australia 750 million AUD Canada 750 million CAD China 10 billion CNY 3,750 million DKK Eurozone 500 million EUR Japan 50 billion JPY Norway 4,000 million NOK New Zealand 1,000 million NZD Poland 1,000 million PLN 4,000 million SEK 800 million CHF 1,000 million GBP United States 500 million USD Turkey 1,000 million TRY

4.2.2 The minimum issuance of a bond for other indexes is shown in the table: Bond Type Minimum Issuance FTSE Pfandbrief 500 million EUR FTSE Euro Corporate Bond 500 million EUR FTSE Sterling Corporate Bond 100 million GBP FTSE Euro Emerging Markets Bond 200 million EUR

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Section 5 Price Sources

5.0 Price Sources

5.1 Price sources

5.1.1 The design of the methodology and availability of the price sources ensures a single price for each bond in the index. FTSE Russell applies quality controls to ensure each single price in the index is unbiased and representative of the market.

The prices used for the calculation of the indexes are based on data sourced from Dealer Banks accessed via Reuters. To calculate the price the arithmetic mean between bid and ask quotes (mid prices) is used in the indexes.

Every bond price is subject to a quality control procedure that was developed and is applied by FTSE Russell. The prices are continually monitored to ensure prices that do not represent the market are removed. In certain circumstances, FTSE Russell will reserve their position to directly contact bond dealers to clarify the price and then action as required. In circumstances such as severe market disruption where pricing is not available FTSE Russell reserves the right to carry over the price from the last business day.

The indexes consists only of bonds that have price quotes and are then filtered through a quality control process to ensure they provide an accurate representation of the market.

5.1.2 Istanbul Exchange prices are used to calculate the Turkish Lira Government Bond Index.

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Section 6 Periodic Change to the Portfolios

6.0 Periodic Change to the Portfolios

6.1 Rebalancing the Indexes

6.1.1 All FTSE Global Bond Indexes are rebalanced every month at the end of the month and at the close of the last business day. 6.2 Addition of constituents

6.2.1 New issues are included in the indexes once a month after the close of the last business day of the month. 6.3 Removal of constituents

6.3.1 The bonds are removed from the indexes at the end of the month after the close of last business day, when the maturity falls below one year, or in the case of the Turkish Lira Government Bond Index when maturity falls below 6 months.

6.3.2 If bonds are illiquid, i.e. cease to have market maker prices, they are removed from the indexes after the close of the last business day of the month. 6.4 Alterations to constituents

6.4.1 Alterations to nominal amounts outstanding are adjusted at the close of last business day of the month. 6.5 Implementation of Changes in the Portfolio

6.5.1 The research is made three business days before the month end regarding which bonds will be part of the index in the next period. This is in accordance with the index scheme, and the issue volume of these bonds (rounded to the nearest 1 million of the underlying currency). The residual life are all bonds which on the first trading day of the new month have a full year (6 months for Turkey) or more to run as per the value date plus three days.

6.5.2 Bonds to be removed from the index, e.g. because their residual life at the beginning of the next month is less than a year (6 months for Turkey), are treated as sold at the fixing price (defined as 4:30pm CET) on the last trading day of the old month, and reinvested uniformly across the whole Index.

6.5.3 A “Shortener” is where a bond is moved, at its fixing price, from one maturity sub index to a shorter maturity sub index. This occurs after the close of the last business day of the previous month when the remaining lifetime of this bond is within this shorter life band index.

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It may occur that some sub-indexes are only temporarily active. When a bond in a maturity band sub index is moved into its neighbouring sub index and no other bond remains in that portfolio, the calculations will no longer be performed for the empty sub index. If a new issue makes the re- activation of this index necessary, the new starting value of this sub index will be amended to a value that includes the market changes occurred since the sub index was de-activated.

6.5.4 New issues are bought at the fixing price of the last trading day of the old month and integrated into the index. 6.5.5 Changes to amounts in issue are included or removed by way of sale or purchase at the closing price on the last trading day of the old month, provided that the change amounts to a minimum value of 1 million Euros or the respective non-EUR domestic currency over the previous month. 6.5.6 After the decisions to the portfolio changes have been made, any removed or newly joined bonds are announced to the market one day before the last business day of the month. These decisions are based on the information available three business days before the last business day of the month. The issuance applicable to bonds in the portfolio for the coming month are also published.

6.5.7 If an issuer fails to pay a coupon on the coupon date (i.e. in the event of default), it will be treated as if it is sold with the latest price considered to be fair, and the proceeds reinvested in the index. In this case, the change of the index portfolio is not postponed until next month-end.

6.5.8 All changes take effect on the first trading day of the new month. Should countries have different holiday regulations at the beginning or end of a month, this will have no effect. The business day of the local market will be employed (TARGET business days apply in the Eurozone – see Rule 1.4.1).

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Appendix A: FTSE Global Bond Index Series Family

Calculated FTSE Global Bond Index Series

The following indexes are calculated daily:

 Turkish Lira Government Bond Index  FTSE Global Bond Index Series

See the indexes included in the Global Bond Index Series in the below diagram.

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Appendix B: FTSE Global Bond Index Series Calculation Formulae

The following notation is used in the following calculations.

Zt value of criterion Z at time t

Zt-1 value of criterion Z at time (t-1)

Z0 initial value of criterion Z

Pi,t clean price of the ith bond at time t A accrued interest to the normal settlement date

N nominal value of amount outstanding

Y redemption

L life to maturity

D (Macaulay) duration

M Modified duration X Convexity

Gi,t value of any coupon payment received from the ith bond for the assumed settlement date at time t or since time (t-1). If none the value = 0 Clean Price Index (Capital Index)

The clean price (PI) or capital index is given by:

PI0  100

 Pi,t  N i,t1 i PIt  PIt1   Pi,t1  N i,t1 i where the summations are over the bonds currently in the index.

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Total Return Index For a market where securities do not go XD, the total return index (TR) is calculated as follows:

TR0  100 (P  A  G )  N  i,t i,t i,t i,t1 i TRt  TRt1  (Pi,t1  Ai,t1 )  N i,t1 i where the summations are over the bonds currently in the index.

For markets where securities do go XD such as UK Government Bonds (Gilt-edged Securities), the formulae have to be modified as follows:

TR0  100

(Pi,t  Ai,t  CPi,t  Gi,t )  Ni,t1 i TRt  TRt1  (Pi,t1  Ai,t1  CPi,t1 )  N i,t1 i where the summations are over the bonds currently in the index, and where CP is an amount that compensates, if necessary, for the quoted price not including the next coupon payment.

If the price at time t includes the next coupon payment then CPt = 0. If the price at time t is ex the next coupon then CPt is the next coupon payment. Average Coupon The average coupon (CO) for an index is given by:

Ci,t  N i,t i COt   N i,t i where the summations are over the bonds currently in the index. Average Gross Redemption Yield

The average gross redemption yield (RY) is the average of the bond yields weighted by both their sizes and their modified durations.

Yi,t  M i,t  (Pi,t  Ai,t )  Ni,t i RYt   M i,t  (Pi,t  Ai,t )  Ni,t i where the summations are over the bonds currently in the index.

The yields are usually compounded on an annual basis. However, for those markets where coupons are paid on a semi-annual basis, semi-annual yields are also shown.

The relationship between a semi-annual redemption yield Ys and an annualized yield Ya is given by:

2  Y   Y  1 a   1 s   100   200 

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Average Time to Maturity The average life (LF) or time to maturity for an index is given by:

 Li,t  Ni,t i LFt   Ni,t i where the summations are over the bonds currently in the index. Average (Macaulay) Duration

The average (Macaulay) duration (DU) for an index is given by:

 Di,t  (Pi,t  Ai,t ) Ni,t i DU t  (Pi,t  Ai,t ) Ni,t i where the summations are over the bonds currently in the index. Average Modified Duration

The average modified duration (MD) for an index is given by:

 M i,t  (Pi,t  Ai,t )  Ni,t i MDt  (Pi,t  Ai,t )  N i,t i where the summations are over the bonds currently in the index. Average Convexity

The average convexity (CX) of an index is given by:

 X i,t  (Pi,t  Ai,t ) Ni,t i CXt  (Pi,t  Ai,t ) Ni,t i where the summations are over the bonds currently in the index. Nominal size of Index

The sum (SZ) of the nominal values of all the bonds in an index is:

SZt  Ni,t i where the summations are over the bonds currently in the index. Index Weight

The weight (W) of the index j in relation to the weight of the All Bonds aggregate index is:

SZ j,t W j,t  100 SZi,t i where the summation is now over all the sub-indexes that make up the aggregate index.

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Appendix C: Further Information

For further information on the FTSE Global Bond Index Series Ground Rules please visit www.ftserussell.com or e-mail [email protected], who will also welcome comments on these Ground Rules. Contact details can also be found on this website.

© 2018 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”) and (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.

The FTSE Global Bond Index Series is calculated by or on behalf of FTSE or its agent. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “WorldBIG®”, “USBIG®”, “EuroBIG®”, “AusBIG®”, “The Yield Book®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI or YB. TMX® is a registered trade mark of TSX Inc.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Global Bond Index Series or the fitness or suitability of the Index for any particular purpose to which it might be put.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a licence with FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.

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